When a political party that has been in power for a long time suffers a sudden
reverse in its fortunes, inevitably the financial media look to market reaction
as a gauge of whether such moves are positive or negative. This of course goes
with the longstanding principle of markets being a voting machine over the
short term but eventually always being a weighing machine. In other words,
fundamentals always triumph over near-term popularity questions.
In Asia though, the political economy is more than a passing fad - indeed, in
most countries it contributes to the bulk of fortunes
enjoyed by businessmen. Thus it is that starting from the region's most
developed economy, Japan, to its least developed countries like Pakistan,
markets pay close attention to the composition of government, frequent
statements, policy actions and the like. Going back to the first paragraph
above, it becomes clear that the weighing machine and the voting machine become
the same thing, in practice across Asia.
Consider here a few recent examples:
1. India's most recent budget, which was unveiled at the end of last month,
proved to be a lengthy list of sops for various interest lobbies but failed to
chart any response to the financial crisis engulfing the rest of the world.
Alongside though, the markets quickly pushed up shares of companies that were
set to benefit from the budget exercise at least in terms of one-off gains.
2. When the ruling Democratic Progressive Party lost the parliamentary
elections in Taiwan, investors heaved a sigh of relief and immediately sent the
market soaring. The potential election of the Kuomintang (KMT) candidate to
president this weekend will help markets rise further. The reason for the
market's optimism is that the KMT is likely to broaden ties with China, the
region's growth engine, and therefore help propel the valuations of Taiwanese
stocks. In effect, because the KMT is more closely associated with a
dictatorial style of government, Taiwanese stocks enjoyed the privilege of
being the best performers in Asia.
3. In contrast, when Malaysia's ruling coalition lost its two-thirds majority,
which merely dents its ability to pass changes in the country's laws, market
reaction was quite negative. Looking more closely though, it is clear that the
markets punished companies that were expected to lose out on lucrative
government contracts due to a change of power (in some states) or the loss of
political patronage (for example companies linked to past leaders of the United
Malays National Organization).
4. More recently, the imbroglio surrounding the appointment of a new governor
of the Bank of Japan helped to create undesirable volatility for markets, and
indeed jolted global foreign exchange markets.
The reason for the wider global markets to prefer dictators to democrats is
fairly easy to understand. Assume that you have two choices - firstly a steady
return of 10% or secondly a more volatile return of 12%. In many cases,
investors would choose the first option because it comes with greater safety.
In the same way, countries run by dictators tend to be predictable and hence
enjoy greater market involvement than those run as parliamentary democracies.
It is not that the markets object to the concept of just about anyone becoming
the leader of a country, they just object to the fact that just about anyone
usually does.
Looking at the history of economic growth across the region, it is easy to see
that the major economic powerhouses were all run by dictators during their most
important phases of growth - Korea, Taiwan, China and the countries of
Southeast Asia all enjoy this similarity, a general disdain for the kind of
freewheeling democracy that helped to restrain India's growth significantly
over the same period.
Defenders of democracy who immediately point out the strong democracies that
now exist in countries like South Korea fail to understand that once the most
difficult period of growth is behind them and the nation is well organized on
industrial lines, it is always possible to introduce democratic norms. It is
when people try to go down the opposite path that problems inevitably occur, as
shown by India.
China and India
What then, about China? The riots rocking Lhasa this week clearly showed the
drawbacks of dictatorship, but only to the extent that the Tibetan people
demanded greater economic growth and advancement. In effect, they were
protesting about not being as successful as their Han brethren.
The response of the authorities to the Tibetan situation has been the same as
its response to the Falungong religious sect 10 years ago - namely to
immediately quell dissent and crush the ringleaders. But for the small fact
that the spiritual leader of the Tibetans is safe in India, China could have
easily achieved a lasting solution to the Tibetan problem this week itself.
China knows from its own experiences - Tiananmen, Falungong, Three Gorges,
Taiwan and now Tibet that the rest of the world may make some silly noises
(like the French government official who this week called for a withdrawal from
the opening ceremony but not from the Olympics itself), at the end of the day
it needs China more than the other way around.
Effectively, the Chinese reaction to anyone protesting its treatment of Tibetan
monks is one of the following:
a. Did you object to Russia committing genocide in Chechnya, or push the
country out of Group of Seven?
b. There is the little matter of the US and Britain making a mockery of
international law in Iraq, if you wish to discuss global human rights.
c. Don't most of you wear sneakers made in Vietnam and smoke cigars made in
Cuba anyway?
d. Do you know anyone else who can sell you a DVD player for US$30?
In contrast, look at India's treatment of its Maoist rebels who have created
significant law and order problems. Various government agencies have been
attempting to negotiate with these extremists for over a couple of years
without a lot of success. The end result is that development of rural areas
infected with Maoist violence has been held back. That contrast to Tibet is
stark, as shown above - and proves quite emphatically that allowing for
democratic niceties is always bad for economic growth.
More importantly, India's genteel treatment of dissent actually attracts the
opposite reaction - namely frequent attacks in the Western media by concerned
commentators who use facts from India's own print media to attack the country's
human rights records. This self-contradiction (ie if India didn't adhere to the
principles of liberal democracy where did you get your data) aside, such
criticism forms a vicious loop wherein Indian media faithfully report the
criticism and in turn spark a whole set of debates on how best to tackle a
Maoist bent on blowing up the Number 21 bus.
Of course, when examining such examples, we should also be careful to point out
the likely negative variants of dictatorships. The prime examples of that in
Asia are North Korea, Myanmar and Pakistan. In these countries, the military
spends considerable efforts to maintain itself in power and thus fails to
deliver any direction for the economy. Suffering from incompetence and facing
off against rising expectations of people, authorities in these countries do
not have the long-term perspective that stable dictatorships like China can
provide. Thus, they resort to corruption and frequent changes of government to
confuse market watchers. It is no wonder that markets never took off in the
first two countries above.
Thus in order of preference, markets prefer to have benign, efficient and clean
dictators. Failing that, they prefer utterly corrupt democracies. While markets
can understand even corrupt dictators, it is the clean liberal democracies that
stump risk takers around the world. Go figure.
(Health warning - this article was written tongue firmly in cheek; the
disclaimer is of course provided here for the benefit of any reader in the
literalist mold. That said, the linkage between strong market performance and
dictatorships is a statistically established fact across non-Group of Seven
financial markets).
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